ASEAN-Hong Kong FTA Offers Sourcing Opportunity
By Colbert Lam
A new free trade agreement is offering manufacturers in Hong Kong expanded access to the markets of the ten member countries of the Association of Southeast Asian Nations. The FTA could offer incentives to move production of goods that have significant intellectual property inputs such as designs, copyrights, formulas, etc., from mainland China to Hong Kong.
There are two key considerations in evaluating this idea. One, goods must qualify as originating in Hong Kong under the FTA’s rules to benefit from lower tariffs when entering ASEAN economies. Two, most or all of the intellectual property associated with the production of the goods should be registered and housed under Hong Kong jurisdiction for enhanced legal protection. Sourcing shifts will therefore make the most sense when the incorporation of the IP into the product can take place in Hong Kong, such as by using a relatively small or automated production facility.
Like all FTAs, the AHKFTA confers origin on goods wholly obtained or produced in the partner’s territory. A product can also be considered originating if it meets the regional value content requirement; i.e., no less than 40 percent of the FOB value of the finished goods must come from one of the partner countries. There are other product-specific rules of origin as well.
The formula for evaluating whether the RVC requirement is met considers inputs such as materials, labor, overhead, and other costs and profit associated with the finished goods. Goods for which IP produced or incorporated in Hong Kong is a significant component, and that are produced in Hong Kong as well, would be likely to meet the RVC requirement under this FTA.
The AHKFTA also offers an opportunity to secure duty-free entry into the ASEAN market for goods currently made in China that nevertheless do not qualify for such treatment under the widely-used ASEAN-China FTA. Given the proximity between Hong Kong and mainland China, it may make sense to relocate both the IP and production to Hong Kong to take advantage of the AHKFTA.